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IN ECONOMICS no bad idea goes unused. This is perhaps to be expected in a discipline that prides itself on being the science of the efficient allocation of scarce resources. Ideas are hard to come by in the best of times. With many hundreds of doctoral candidates looking for original dissertation subjects, and many thousands of tenure-track assistant professors looking for profound article topics, nothing that looks like an idea can be allowed to waste its fragrance on the desert air. In addition, there are the diurnal needs of business-page journalists and bond salesmen. Not to mention the problems of NEW LEADER columnists.

A subject that has met all the above needs for at least the past quarter century is the productivity index. It is with mixed feelings that I report on a quite new use that has been thought up for this fallacious procedure. Since, as we shall see, the new use is in the very highest reaches of national policymaking, it is in an especially bad place for a bad idea.

The February 8, 1982, column in this space was titled “Productivity: The New Shell Game.” On May 28, 1984, “The Productivity Scam” appeared. The third antiproductivity- index piece had to wait until May 19, 1993, and the fourth is here and now. Productivity being a protean idea, each column is concerned with a different use of the index.

True to its metaphor of a shell game, the earliest column said that in the new game each of the three shells had a “pea” under it. The first pea, “which always turns up on metropolitan bars and suburban bridge tables,” was that “it just seems people aren’t willing to work the way we did when we were young.”

Next was the “America has gone soft pea.” We let them beat us in Vietnam; investigative journalism got out of hand over Watergate; and now a court has said that creationism isn’t science. It’s hard to tell what the country stands for anymore. It’s no wonder that productivity is down and we have to have this recession to get us back on the track.

Under the third shell was the “archaic industry pea.” Our productivity is down because we don’t invest enough, because we don’t save enough, because we tax business-too much.

In other words, the productivity “peas” were Reaganomic explanations of the recession then stagnating. Regardless of the shell we chose, we got a pea; and regardless of the pea we got, we lost.

By May 1984, the productivity focus had narrowed, with this conclusion: “The uproar about labor productivity is a scam to distract attention from a massive shift in the distribution of the goods of the economy. The share of nonmanagerial labor is being reduced; the share of managerial labor is being increased; and the share of those who do no labor, who merely have money, is being increased most of all. This is what Reaganomics (or, if you will, Volckerism) is all about, and the Atari Democrats have been gulled into going along with it.”

(Those whom the late Robert Lekachman, a wise and witty contributor to this journal, dubbed Atari Democrats called themselves New Democrats. Atari was at one time the leading producer of electronic games, and was early seduced abroad by the promise of cheap labor. What became of it, deponent knoweth not.)

Nine years later (May 19, 1993), the focus had narrowed again. The talk was all about downsizing, a nasty and disgraceful business practice that continues to this day.

The productivity index is thus one of the most powerful ideas of our time. It has malignly affected the lives of millions of men and women, the fortunes of thousands of enterprises, and the economies of nations. It is a tragedy of almost universal scope.

The basic idea of the index is sound enough. Output is divided by input to determine how many units of input achieve a unit of output. The result is an index number that can be compared with other numbers similarly derived. A single index number, of course, is almost useless; but much can be learned from comparisons, and they are of great and daily use in business management. The current performance of a company’s sales (or any other) department can be compared with. its performance in prior years, or with the performance of corresponding departments of the particular industry as a whole. Banks routinely analyze their customers’ profit and loss statements in this way, and trade associations frequently do the same for their members.

It must be confessed that executives sometimes make unreasonable use of the comparisons. A sales department may be faulted for a falling sales index, while the sales force argues that the quality of the product has declined, or that the advertising has been inadequate, or that the sales representative suffer from stress caused by driving poorly equipped automobiles.

Rumbles from the executive floor suggest that the sales reps are too well paid, or that there are too many of them, or that some territories are not worth covering. This is the way that downsizing begins. Every job in every department is ultimately at risk.

Years ago a chapter in a tome on book publishing started this way: “There are two simple principles by which the business thinking of a publishing house should be guided. They are (1) Reducing costs by $1,000 has roughly the same effect on the profit and loss statement as increasing sales by $25,000. (2) You have to spend a dollar to make a dollar.

Downsizing tends to forget the second principle, and also the greater principle that the human beings who are so easily hired and fired are not a means to an end but are ends in themselves. But the ethical objections to downsizing shouldn’t allow us to decide that there are not solid, hard-nosed, business-is-the-only-thing objections to the national productivity index.

THE INDEX numbers are simple fractions: national output for a certain period in dollars (because we can’t add shoes and ships and sealing wax) divided by the hours worked by everyone engaged in production, whether paid or not. Fractions, of course, are not unequivocal; you can increase their value either by increasing the nominator or by decreasing the denominator (2/3 and 1/2 are both greater than 1/3). So you can increase a productivity index number either by increasing “dollars of output” or by decreasing “hours worked.” As we shall see, the hours present a special problem. Consider some examples of how the index works.

First, microeconomically: Think of a journeyman plumber whose output is x, whose hours worked is y, and whose productivity is therefore x/y. Suppose by taking on a plumber’s helper (a human being) he increases his output 20 per cent. Being a rational person, you might conclude that such an increase in output would result in a substantial increase in productivity, but you would be sadly mistaken. According to the formula, his productivity becomes 1.2x/2.0y, or .6x/y, and thus has fallen 40 percent.

We get similar results macroeconomically. Take the 5.4 million or so people counted by the Bureau of Labor Statistics as unemployed. (There are about 10 million more who aren’t counted because they have a part-time job, or are too discouraged to continue looking for work, or are too turned off ever to have seriously entertained lawful employment).

Let’s accept (for argument only) that the conservative press is correct in saying the 4 percent of our civilian workforce officially designated unemployed are so careless, stupid, uneducated, arrogant, sickly or pregnant that they’re unlikely, if employed, to produce on the average more than a third as much as an equal number of those who are currently employed. Even at that level, if we could find the wit and will to employ these people on this basis, we could increase our gross domestic product by 1.2 percent, or about $130 billion a year.

Being still a rational person, you might think such a tidy sum would increase our productivity, but again you would be sadly mistaken. Productivity is still output divided by hours worked or x/y. After finding jobs for the 4 percent of our civilian workforce that is now unemployed, our productivity becomes 1.012x/1.04y, a fall of 2.7 percent.

So if we really believe in the conventional theory of productivity, we must deny help to our plumber and jobs to the unemployed. Unfortunately, a large majority of the members of the American Economic Association do believe in the theory.

A couple of other examples may clinch the case.

A young slugger lived up to his promise by hitting a grand slam home run his first time at bat in the majors. His next time up, there were only two men on base. His manager yanked him because (aside from drawing a walk or being hit by a pitch, neither of which would count as a time at bat) his productivity could only go down.

Then there was the unsung predecessor of Tiger Woods who hit a hole in one on the first hole of a club tournament, but retired when his drive on the second hole stopped rolling two feet short of the cup. “My productivity could only go down,” he lamented as he gave his clubs to his caddy and took up water polo to sublimate his aggressions[1].

THE THING about “hours worked” is that Gertrude Stein couldn’t have said “hour is an hour is an hour” because they aren’t. I was a lousy salesman, though I worked doggedly at it for almost five unproductive and depressing years. Many years later I became a moderately successful CEO of a small company and worked doggedly at that. I put in approximately the same number of hours a day as a salesman as I did as a CEO. After all, there are only so many hours in a day. But the value of my work as CEO really and truly was vastly greater than the value of my salesmanship, and you may believe I was paid more for it, too. Adding those different hours together in the denominator is less sensible than adding apples and oranges.

Karl Marx[2] faced a similar problem when he was wrestling with his theory of surplus value. He finally declared victory and wrote: “We therefore save ourselves a superfluous operation, and simplify our analysis, by the assumption, that the labor of the workman employed by the capitalist is unskilled average labor.” If this was a valid assumption in his day (and it probably wasn’t), it certainly is not in ours.

John Maynard Keynes also felt a need to devise a homogeneous unit of labor. He wrote: “Insofar as different grades and kinds of labor and salaried assistance enjoy a more or less fixed relative remuneration, the quantity of employment can be sufficiently defined for our purpose by taking an hour’s employment of ordinary labor as our unit and weighting an hour’s employment of special labor in proportion to its remuneration, i.e., an hour of special labor remunerated at double ordinary rates will count as two units.”

The minimum wage (currently $5.15 an hour) may be taken as a homogeneous unit of labor. But why bother? It is merely a multiple of a homogeneous unit we already had ($1.00) and tells us nothing new.

Unless you naturally think like an economist, you may wonder why the denominator of the productivity fraction is “hours worked” rather than “dollars paid for labor.” The deep secret is that economists, like well-bred characters in an early 19th-century English novel, are with a few exceptions embarrassed by talk about money. General equilibrium analysis, the most fashionable economic theory at the bulk of elite American universities, can find no place for money in its doctrine. Even monetarism, despite its name, is scornful of the stuff we pay our bills with, which it speaks of as “nominal” money, and insists that what it calls “real” money is what matters, although no such thing exists. (If you’ve read much medieval philosophy, you may find such talk familiar.)

There is another problem with the denominator. We learned in school that the factors of production are land, labor and capital. Some add technology, and Adam Smith wrote of a propensity to barter. In any case, labor is merely one of the factors of production; yet the productivity index treats it as the only one.

To be sure, labor may be the largest factor. A quasi-constant of the economy is that the cost of labor currently runs about 60 per cent of GDP. But the cost of capital-the money spent for interest by nonfinancial, nonagricultural businesses -has increased roughly five and a half times in the past 40 years, partly because the Federal Reserve has increased interest rates, and partly because today American business relies much more on borrowed money than it used to. Common laborers, not Protestant financiers, are now the austere actors on our economic stage[3].

This shift in roles may be good or bad or indifferent, but the productivity index, no matter how constructed, will at best only call our attention to the fact that a shift has occurred. It will neither judge the desirability of the shift nor tell us what to do about it. Econometrics-c-playing with statistics-is the beginning, not the end, of economics.

ALL THAT said, we come to the new use of the productivity index mentioned at the start. I’m sorry, but I can’t say who invented the new use. It was a stroke of genius, even though the Federal Reserve Board had already pioneered the implausible idea of using high productivity (according to the index) as an excuse for trying to reduce production. I’m sorry again, but I can’t say, at least with a straight face, why we should reduce production.

The new scheme goes like this: (1) Production is produced by workers exercising their productivity. (2) The population of workers increases about 1 per cent a year. (3) The productivity index, fallacies and errors and all, increases about 1.5 per cent a year. (4) Put them together, and you get 2.5 per cent a year as the rate at which a well-mannered economy should expand. (5) The economy has been expanding at better than that rate in every year except one in the last eight. (The low one was 2.4 per cent in 1993.) Conclusion: Look out! It must be overheating!

Well, I ask you!

I regret to have to add that the Democratic Party Platform Committee listened solemnly to this kind of stuff. I doubt that the Republicans bothered their heads about it. All they need to know on earth is that a tax cut is beauty, and beauty is a tax cut, especially a tax cut for millionaires. I regret further to have to admit that the economics profession is careless about such nonsense. The other day I read a paper by a friend of mine that was decorated by several equations in which a symbol for productivity occurred. I objected that the symbol stood for a fallacy, and that his equations were therefore fallacious.

He laughed. “Everybody does it,” he said. “You’re expected to do it. It doesn’t matter.”

Well, I’ve already asked you.

The New Leader

[1] Ed: As a similar tale goes, a golfer played at Pine Valley, arguably the best golf course on earth, and in the first four holes had two birdies and two eagles. One eagle was a hole-in-one. He was 6 under par. The fourth green is back at the club house. The golfer walked off the course and into the bar and would not come out as he’d only screw up the round.

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EVERY NOW AND THEN a learned journal carries an article, or a think tank issues a report, that effects a significant change in academic theory. Once in a blue moon, such an article or report results in a revision of public policy.

Given the volume of material produced every year by the dozens of think tanksand scores of learned journals devoted to economics, it is no wonder that even many of their best offerings bloom to blush unseen. Neither is it surprising that the most open of professions is slow to embrace challenges to established doctrine (and hence, if you want to be mean-minded about it, to established reputations). It is doubtful that learning could proceed in the midst of incessant turmoil.

That said, the fact is that groundbreaking work does appear; moreover, its appearance must be widely discussed if learning is indeed to proceed-and if public policy is to benefit. Accordingly, I rise to salute a recent article and a recent report. The article, by Fred Block, professor of sociology (not economics) at the University of Pennsylvania and the University of California, Davis, is entitled “Bad Data Drive Out Good: the Decline of Personal Savings Revisited.“ It leads off the Fall 1990 issue of the Journal of Post Keynesian Economics. The report, by Robert A. Blecker, assistant professor of economics at American University, is entitled “Are Americans on a Consumption Binge? The Evidence Reconsidered.“ It is available from the Economic Policy Institute, 1730 Rhode Island Avenue, NW, Washington’ DC 20036.

These two papers are careful empirical examinations of two claims or assumptions that have ruled American economic policy for the past 30 or 40 years, and especially for the past 10. Blecker looks at the claim that Americans are irresponsible wastrels who have starved American industry and the American government. Block looks at the related claim that personal savings in this country have fallen so low we can no longer finance our own deficits or maintain a civilized standard of public services.

Together the Blecker and Block papers destroy both claims at their roots and thus cut off the theoretical sustenance that has nourished Reaganomics and Bush Voodoo. If it is not, as a matter of empirical fact, true that Americans have been consuming at an extraordinary rate, or that they have failed to save at some expected rate, then there must be other reasons to explain the misfortunes the American economy has suffered over the past decade.

A couple of months ago I remarked on the irony that the noisy supply-siders of recent years are now noisily complaining that the current recession has been caused by the failure of the demand side to consume (“Our Austerity Recession,” NL, January 14). They can’t have it both ways – the more fools we if we let them. Nor should we continue to hang our heads in shame whenever our saving is compared with that of the Japanese and Germans. As Block shows, we’re saving more today than we did in the early postwar years when our unemployment rate was lower, our inflation rate was also lower, and our after-tax profits were higher. On the record, it is not improbable that we have been saving too much rather than too little.

Besides the empirical facts about saving, there are a couple of theories. The one you hear in urban bars, on commuter trains and within the Washington Beltway argues that if you want to make anything (the supply side), you have to have proper raw materials and tools, and you have to have enough food, clothing and shelter to keep you and your colleagues going while you’re making it. Saving all these things, in short, is necessary to production. After all, you can’t grow corn unless you’ve saved seed.

But no so fast. You can’t save seed unless you’ve already harvested it. Your ancestors had to gather seed before they could plant their first crop. That’s not a quibble, but since it sounds like one lets turn to high theory.

In college classrooms, saving equals investment, or S = I. This neat little equation, arrived at independently about 60 years ago by John Maynard Keynes and MichaI Kalecki, is fatally flawed yet has been fatefully influential. Kalecki published his work three or four years before Keynes; but because he wrote in Polish, only his countrymen and only a handful of them-knew about it until much later (minority-language advocates, please note).

Keynes was well aware of the virtue in if and devoted many pages of his great book to defining his terms so that his propositions made sense. But no more than Homer was he exempt from nodding, and here he did nod, with dire consequences. In these instances he is correct only in “real” terms, that is, only if he is talking about goods and services and is specifically excluding money and any of the legal instruments possible in a money economy. But we do live in a money economy (as Keynes knew more profoundly than his predecessors and most of his successors), and our society would collapse if we tried to live without money.

In another passage Keynes gives “investment” a portmanteau definition that is misleading in a different respect. He writes, “In popular usage it is common to mean by [investment] the purchase of an asset, old or new, by an individual or a corporation. Occasionally, the term might be restricted to the purchase of an asset on the Stock Exchange ….” Again Keynes nods. A share of stock or a bond is not an investment in the same way that a machine purchased with the proceeds of that share or bond is an investment. The machine is a producer’s good; it makes other goods. The share or bond makes nothing; it is not an economic good at all, it is a legal asset.

Keynes had some fun writing about stock speculators who made (or lost) money guessing what other speculators were going to do, and he implied that the New York Stock Exchange is a casino (which it isn’t). Still, he had little trouble believing that the exchanges were reasonably efficient ways of evaluating business enterprises. Although he was pre-eminently the analyst of a money economy, he did not quite see that a bull market continues to rise only with continuing infusions of money that is thereby denied to the producing economy (or what he called the industrial circulation).

In short, the conclusion of his (and Kalecki’s) exercise should have been: Saving equals investment plus speculation.

THE CORRECTION is clearly necessary if the elements of the equation are to be quantified in terms of money. Once one has money, it is obvious that one can hide it under one’s mattress. Hidden money is certainly saved, and just as certainly it is not invested. Hoarding (which Keynes called liquidity preference) may be done for a great variety of reasons, but all of them amount to speculating that the future will be more propitious for investing or consuming than is the present.

More important than hoarding is the money that flows into a bull market. While that influx of money may be said to be “invested” in the market, it has only tangential effects on the enterprises whose shares are traded. Practically all the activity on every exchange is speculation, and most of it is in search of capital gains (see “Why Speculation Will Undo Reaganomics,” NL, September 7, 1981). Similarly, investing in land is frequently speculation. The saving for which the Japanese are famous is sunk in real estate to such an extent that you could buy all the land in the 50 United States for less than you would have to pay for the land of Japan (even though it is smaller than Montana).

The high price of real estate does not make Japan a better place to live, of course, or even a richer country. But it needs to be said that speculating doesn’t make any country a better place to live. And it is crucial to insist that saving equals investment plus speculation. Policies that are supposed to encourage saving, such as many advanced in the U.S. this past half century, are worse than useless when what is encouraged is speculation rather than investment.

The Block and Blecker papers underscore this point. They prove that we have not been on a consumption binge, and that we have not imprudently failed to save. Since our interest rate has unquestionably been too high for our industries, since we have unquestionably used money borrowed abroad to finance a large part of our deficits, since those deficits are unquestionably used to excuse our failures in education and medical care and the general welfare, we must now look beyond the false answers of high consumption and low saving to find the explanation not only for the current recession but for the shameful general performance of our economy.

I’ll give you a couple of hints. Try looking at (1) the increasing share of our income that is diverted to speculation, and (2) at the increasing polarization of our society.

The New Leader

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IN THREE recent contributions to this space[1] I have argued that the conventional theories of inflation are wrong-that it is not caused by full or almost-full employment, and that it is not cured by raising the interest rate. I have gone further: I have maintained that raising the interest rate (which I call the Bankers’ COLA) is precisely what produces inflation in the first place. A legitimate question now is: What do I propose we do?

Let it be admitted – nay, insisted – at the outset that there aren’t any easy answers. No matter how ingenious the laws we enact, we can be certain that ingenious ways of avoiding them will be discovered. Legal avoidance happens with even the most uncomplicated statutes. There is a book out on how to defend against a drunk-driving charge by a trial lawyer who has had thousands of such cases and never lost a one. The unremitting search for loopholes in the income tax laws is sporadically countered by searches for ways to close them. It will be the same with whatever we propose. Perfection is impossible, because perfection cannot act.

To control the interest rate – to eliminate the Bankers’ COLA – one must be able to control the money supply. The Federal Reserve Board tries to do that now (for reasons different from those I’ve advanced) by fiddling with the reserve requirements it imposes on the banks and with the interest it charges them for temporary loans. Using these levers, the Fed can control the supply pretty well; but the interest rate – the cost of money – depends also on demand, and there is one demand for money that the Fed has so far refused to do much more than talk about. Seven and a half years ago (“Why Speculation Will Undo Reaganomics,” NL, September 7, 1981), I wrote in these pages: “Unless one is ready to run the printing presses flat out, the only way to get money into productive hands is to see to it that little or none of it falls into speculative hands.”

Although there is probably no way of keeping speculators from getting their hands on money if they want to, it would be quite easy to keep them from wanting to. All one has to do (as Felix Rohatyn and others have suggested in order to inhibit leveraged buyouts) is tax capital gains at 100 per cent on property held less than a year or two, then at 95 per cent on property held less than two or three years, and so on until the rate got down to the level of ordinary income. (This, it will be noticed, is exactly contrary to the proposal of our new President, but he has never been quite clear in his mind what was and what was not Voodoo Economics.)

The foregoing, however, earth shaking as it is, would not be enough. For the archetypical speculators of our day are not beefy gents in flashy suits on the order of Betcha-million Gates or even aristocratic gentlemen with narrow ties on the order of J.P. Morgan or even indescribables like Ivan Boesky. No, the big-time wheeler-dealers are “institutions,” and institutions are churches and colleges and foundations and pension funds and insurance companies and mutual funds. We might almost say with Pogo that we’ve met the enemy and they is us, for most of us are beneficial owners of pieces of one or more of the nameless, faceless institutions the market gossips gossip about.

These institutions, our surrogates, write the computer programs that run the market, and they do it for capital gains. Unless that candy is taken away from them, it will do little good to take it away from the old-time speculators who still exist. Consequently, we’ll have to take a deep breath and tax the capital gains even of charitable institutions. (I said it wasn’t going to be easy.) The demand of nonproducing speculators for money would thus be greatly reduced, if not altogether stopped, and the Reserve Board, by increasing the money supply, could lower the interest rate for everyone else and take a step toward eliminating the Bankers’ COLA.

But it would be only a step. The bankers would resist, and their line of argument would be practically identical with the one they used in freeing themselves from most of the New Deal regulation. They were, in fact, remarkably successful in getting Democrats to make their arguments for them, as William Greider documents at excellent length in Secrets of the Temple. For example, Wisconsin’s recently retired Senator William Proxmire “delivered a short lecture on inflation and interest rates. At 15 per cent inflation, an investor lending $1 million at 10 per cent ‘loses’ $50,000 a year. ‘You cannot count on the lender being a complete idiot,’ Proxmire said. Sooner or later, he will stop lending at the low interest rate and invest the money himself in commodities or real estate.”

Our capital gains tax would cancel the commodities option and could be made to cancel the real estate option, but suppose the Senator’s million-dollar lender is smart and doesn’t lend at all, thus saving that $50,000 “loss.” He would be like the unfaithful servant in the parable, for at the end of a year he would have only his million dollars, while his neighbor, who wasn’t so smart and lent his million at 10 per cent interest, would have $1,100,000. What happened to the $50,000 loss Senator Proxmire talked about? If there was anything more to it than fancy rhetoric, the 15 per cent inflation affected both investors. The one who refused to lend wound up with $850,000 worth of purchasing power, while his neighbor wound up with $950,000. A negative “real” interest rate, in apparent defiance of the laws of mathematics, proves to be greater than zero. Perhaps we can count on the lender not being a complete idiot.

Of course, the millionaires have other choices. They could take their money and invest it directly in productive enterprise, or they could live it up. The former option is what we had hoped they would do, anyhow; that’s why all the editorial writers in the land have been urging them to save. As for the latter option, they might find consuming a million a little difficult, but it would be fun to try, and the economic result would at least be some priming of the pump. Someone has to consume what the economy produces.

The fact remains, though, that both millionaires have taken a loss in purchasing power, and that deliberate, cold-blooded national policy has forced the loss upon them. That’s not nice, and it’s nothing we can be proud of. So what can we do? Well, all that the Fed and other true believers in traditional economics have proposed (and put into practice) is raising the interest rate, usually by restricting the money supply. That’s how former Reserve Board Chairman Paul A. Volcker got the prime interest rate up to 21.5 per cent in December 1980, while the Consumer Price Index was up only 13.5 per cent, leaving Senator Proxmire’s investor with “real” interest of 8 per cent, which should have made him happy. The funny thing was, it didn’t make others eager to become like him. The real interest rate was greater than the prime itself had ever been (with one exception) before 1978; nevertheless, the national savings rate fell, and in spite of the subsequent Reaganomic tax cuts for the wealthy, the savings rate continued to fall. Moderately reflective true believers should have had their beliefs shaken just a bit.

Moderately compassionate believers should have been severely shaken by what else happened. The number of people unemployed went from 6.1 million in 1979 to 10.7 million in 1983. In the same years, 9.2 million more people were impoverished, and the median family income (in constant dollars) fell $2,305. That was not so nice either, and it was brought about by deliberate, coldblooded national policy.

Nor was that the whole story. The Federal deficit soared, our foreign trade was savaged, and Latin America was saddled with loans at un-payable interest rates. And all this was done to keep the real interest rate from falling below zero.

IFTHAT WERE merely a trade-off – suffering a lot of grief and getting back a little stability – it would be bad enough, for what was exchanged was the livelihood and prospects of millions of fellow citizens for the” reality” of usurious interest rates. The economy was deliberately depressed to “save” it from the possibility – the mere possibility – of being depressed later. But the savings rate continued to fall, corporate investment continued to fall, and industry after industry was allowed to fall before the Germans and Japanese, the Koreans and the Taiwanese.

At this point Wall Street-wise types will explain that Volcker was concerned about more than Senator Proxmire’s millionaire; he was concerned about the Japanese. He needed their money to pay for the deficit, which was all of $40.2 billion in 1979 (or about a third of the Gramm-Rudman target President Bush is going to be unable to meet). If Volcker had not given the Japanese what they wanted, they wouldn’t have bought our bonds, and Proxmire’ s millionaire would have sent his money abroad. The argument, in short, is that any attempt to reduce the interest rate will cause a flight from the dollar, and that the flight cannot be stopped because the financial world is international, its denizens are multinational, and they communicate electronically, instantaneously and secretly.

That is almost true. Yet multinational corporations are taxed. Granted, some of them may not be above diddling their books a bit, and very likely the diddling is difficult to detect; but taxes are collected, and where taxes are collected money can be controlled. The fact that financial operatives set up shop in the Cayman Islands to escape inconvenient regulation indicates that a flight from the dollar has to be an actual flight; a pretended flight won’t do.

We could perhaps stop the flight if we wanted to, but it would be much easier to let the money go. It is merely marks on paper; the factories and even the computers remain. The time to do the stopping is when the money wants to come back. Under present law, the Treasury Department is responsible for control of foreign exchange. It could require those who want to bring money into the country to go to the Treasury to buy dollars and to satisfy any taxes and regulations they had been fleeing from. The flight would no longer be so attractive, or serve any purpose.

Would that be the end of the problem? Of course not. Still, the proper direction of policy is, I think, clear. To control inflation, the interest rate has got to be brought down – way down. To do this, money has to be withdrawn from speculation and made available to productive enterprise. Faced with inconvenient regulation, finance will flee the dollar. The flight can be controlled by controlling foreign exchange. Such control will certainly affect foreign trade; but only doctrinaire true believers in laissez faire will blanch at that, and doctrinaire laissez faire is what got us into the mess we’re in.

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THREE AND A HALF years ago, in THE NEW LEADER of November 26, 1984, to be exact, I made a prophecy that is remarkable among my prophecies in that it has come true. I said we would “start hearing a lot more about the value-added tax-how it is widely used in Europe, how invisible it is in comparison with the sales tax, how comparatively easy it is to collect, how it taxes consumption rather than production …. What we get won’t be called a value-added tax, but what’s in a name?”

Well, the name that seems to have been settled on is consumption tax, and the chorus in support of it is tuning up with a vengeance. For some reason no one bothers to explain, the stock market crash of last October 19 is thought to have provided a suitable occasion for taxing consumption. Everyone from Pierre DuPont to Peter Peterson has solemnly warned us that Wall Street won’t be satisfied with anything else. (If you asked me, I’d say Wall Street has a problem satisfying the rest of us. Who laid the egg, anyhow?)

As a distinguished example of consumption- tax thinking, I cite Robert M. Solow of the Massachusetts Institute of Technology, who gave the following advice to the next Presidentin a recent issue of the New York Times: “If there is no recession, the first order of business is to make a start on reducing the deficit…. And [the President] should do it by increasing taxes on consumption, not investment …. Because a consumption tax means spending will fall, he must do something to offset that like lower interest rates.”

Now, Solow is not a fool; I don’t think you get to be an MIT professor by being a simpleton. Nevertheless, and putting aside a question of fact (hasn’t a “start on reducing the deficit” already been made?), I ask you to look closely at his two-step policy recommendation. First step: He would tax consumption. In other words, he would reduce the standard of living of the middle class (the poor will presumably not be taxed, at least not much, on necessities, which is what they mostly consume; and the rich won’t be much bothered). Second step: He would lower the interest rate. If the middle class stops consuming there will be a depression, so he would keep them consuming by making it easy for them to borrow. (When liberals propose lowering the interest rate, Wall Street insists that only the impersonal unregulated market can do it, but let that pass.)

Let us suppose Solow’s scheme works. What will the next President have accomplished? (1) The deficit will have been reduced, at best, by the amount of the consumption tax. (2) Since nothing will have been done to stimulate the economy, it will, at best, continue to languish in its present “prosperity.” (3)

Some indebtedness will have been shifted from the nation as a whole to the middle class as individuals. (4)The money borrowed by the middle class will have been lent them by the rich, whose extra dollars will have been left untaxed to better enable them to make this “investment.”

Solow’s scheme is, as the mathematicians say, elegant in its simplicity. But I don’t think it will work, at least not if its purpose is anything other than a transfer of wealth from the middle class to the already wealthy. The scheme would bring about such a transfer; there’s no doubt of that. There would also be some leakage, as the economists say. Because the middle class’ spending money will in effect be taxed twice (once by the consumption tax, then by the interest paid on the borrowed money), spending will be reduced after all, and the proceeds of the consumption tax will be correspondingly reduced. Depending on the new interest rate, the reduction in spending could be very large-large enough to bring on another recession (if you’re timid about saying “depression”).

Now I ask: We already did this, didn’t we? Do we have to go through it all again? We did it in 1981, and we got the depression (I’m not afraid to use the word) of 1982, not to mention the deficit everyone talks about. Those whose attention span is very short may have forgotten about the Laffer Curve, which purported

to show that you could increase tax collections by reducing the rates, and the Kemp- Roth tax bill, which promised to increase investment by cutting taxes, especially of the rich. Those were the heady days of the supply-side theory, but investment didn’t respond as promised. What actually happened was that tax collections fell far below expectations, creating the mega deficit that was covered by bonds paying usurious interest rates, purchased by the rich with their tax-cut windfalls. In effect the rich were given the bonds, just as Solow’s scheme would give the rich the promissory notes of the middle class. It is deja vu.

Indeed, it is, if Yogi Berra will pardon me, deja vu all over again: The Great Depression was also preceded by tax cuts for the rich. I do not think this is mere coincidence, or mere post hoc, ergo propter hoc. For I am persuaded that there is a fatality about economics that in the end chokes any society making too great a distinction between the rewards of the favored and of the disfavored. It is a commonplace of legal theory that a law must not only be just but also be seen to be just. It is the other way around with economics, where it is more important for a policy to be fair than for it to be accepted as fair. This is particularly true when it comes to policies determining the distribution of a society’s rewards.

As near as we can tell, the Roman mob was appeased, if not altogether satisfied, by bread and circuses; but in the imperial city alone, upwards of 150,000 lived on the dole, while uncounted thousands waited upon the whims of the favored few. Labor power is the ultimate power-and Rome threw it away. In 1928, a year we look back on as a period of idyllic prosperity, almost 60 per cent of American families lived in poverty; then calculated at less than $2,000 a year. Now we have an underclass, and we have a large class of the underemployed. This costs us, and may finally destroy us; yet it would seem that substantial majorities of American voters have been satisfied with current policies. The policies are seen to be fair, but their actual unfairness may be our undoing.

The rich have always had a problem knowing what to do with their money. In times past it could always be invested in land and in improvements thereon. The improvements, whether in the shape of stately homes or scientific agriculture, were craft industries. Each staircase or mantelpiece designed by Grinling Gibbons and carved by him or his apprentices was the subject of an adhoc contract between him and the lord of the manor. There certainly was demand for his work, and this certainly affected how much he could charge; he did not produce for a market, however, nor was he himself an important outlet for what was produced on the estates where he worked.

The problem of today’s rich is different. In the first place, they have not become rich by investing in land-speculating in land, maybe, but accumulating rents, no. In the second place, their riches are vastly greater than the sums necessary to recreate a Chatsworth or a Montacute, should their fancy happen to take that turn. In the third and most important place, industry today is built on mass production: Giant corporations serve giant markets.

The giant markets are crucial; without them the giant corporations cannot exist. Giant markets are masses of people willing and able to buy. Such masses need to include the employees of the giant corporations, and the employees are able to buy only to the extent that they are well paid. Henry Ford talked as if he understood this, but even his shockingly high wages were not enough to raise his employees out of the ranks of the working poor. In any case, his has remained a minority view among American businessmen. The majority view, in recent years embraced by the electorate at large, is that consumption should be curtailed and investment should be encouraged.

IRONICALLY, consumption has nevertheless expanded as the banks have discovered profits to be made in personal loans at usurious interest rates. There are limits, though, and they have been reached in many an industry. Automobile companies struggle to maintain their share of the market, because the market is limited, and because the industry’s present capacity is much greater than the market. Steel mills, all over the world, are closed down or running at a fraction of capacity. Agriculture produces more than could be consumed even if somehow the idiocies that permit widespread starvation could be overcome.

The inevitable consequence of limited markets is limited opportunities for productive investment. Hence, as we’ve remarked here before, the rich have more money than they know what to do with, and so do the massive pension and charitable funds. Besides, the glittering gains from speculating in a churning stock market are enormous. In the eventual crash the too-much money of some of the rich and of some of the funds disappears; on October 19 perhaps as much as a trillion dollars disappeared forever. The Reagan revolution created a deficit to give this money to people who couldn’t use it.

The appalling fact is that practically everyone seems to want a repeat performance. It would appear that the first eight months of 1987, when the Dow went from under 2,000 to over 2,700, was the happiest period in millions of tawdry lives. Every day the “financial” news was a joy. Individuals with a few shares of a mutual fund and college presidents with great fortunes in their care were equally delighted. Economists, who gave the stock market a prominent place in their models, looked upward. Brokers stood tall. Arbitragers stood taller. Tens of millions more, although not directly involved, shared in the euphoria.

Despite the shock of October 19, these people seem determined to do it again. More stridently than ever the claim is being made that the stock market is both the heart blood and the brains not only of the national economy but of the whole free world; that our liberty as well as our prosperity depends on its ineffable wisdom; that any attempt to control it would, in the tasteless cliché, throw out the baby with the bath water.

Worse, we hear again the cry to tax consumption, with the deliberate purpose of destroying the mass market modem industry depends upon-which would foreclose rational investment opportunities and bring on a new fever of speculation. Some of this can be explained as simple greed. But beyond that there is a pathological psychology whose etiology I can’t even imagine.

The New Leader

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ONE LISTENS with astonishment to the explanations of the Great Crash of 1987. With unprecedented unanimity, pundits and brokers and bankers and public officials call the budget deficit and the foreign trade deficit to blame.

In his post-crash press conference, President Reagan seemed not to understand. He was being pushed into what the press called a summit conference with Congressional leaders to see about reducing the budget deficit, but his heart plainly wasn’t in it. Look, he protested, the budget has been Gramm-Rudmaning down and will go down some more, even without a conference. He couldn’t see what is so bad about that trend, although he was ready to blame the Democrats for anything anyone happened to think bad about it.

It’s not hard to share the President’s bewilderment. If the budget deficit is a problem, it is in fact being reduced. A few hardliners may be upset that the reductions are not greater and faster; yet most people (including Ronald Reagan) have absorbed enough from Keynes (whom the President gracelessly and ignorantly disparaged) to know that doing too much too fast with the deficit would be a pretty sure prescription for a recession. Keynes himself might well have thought the reductions an utter mistake at this time. But he is dead (as we all are in the long run), and what is actually being done is what the pundits say Wall Street wants. If Wall Street is really upset by the deficit, it should have broken two years ago, when the deficit was higher, or five years ago, when the deficits (and the market itself) started their dramatic climb.

No, the deficit story is a fairy tale. It is implausible on its face, and its implausibility can readily be tested. We had a pretty good market crash in 1929. What happened then? Well, one thing is sure: The 1929 crash wasn’t caused by a budget deficit, for the budget was in surplus that year to the tune of $700 million, which was a lot of money back then. Either the crashes of 1929 and 1987 are totally different breeds of animal, or deficits had nothing to do with either of them.

The two crashes did, without question, have one thing in common. Both were preceded by prolonged and steep run-ups of the stock markets. That in itself is no surprise, since you have to have attained a certain height to be able to make an attention-getting fall. But what it signifies is that both climbs were speculative: Business didn’t improve all that much. Though in both years all persons of prominence assured us that the economy was fundamentally sound (there seem to be no other words to express this meaningless thought), in neither year was there a justification for the heights the market reached.

Speculation, however, doesn’t need a justification; it merely needs an occasion. The necessary occasion is a very simple one: Some people have to have more money than they know what to do with. Literally.

Now, it is practically impossible to spend a million a year on living well (although some 57 professional baseball players are having a go at it), and it is perfectly possible to be pretty comfortable, even in a high-priced city like New York, on as little as a hundred thousand. You can, of course, spend pots of money collecting lead soldiers or used postage stamps or post impressionist masters. The trouble with such collections is that, even at a moderate rate of inflation, they increase in value very rapidly and so add to rather than deplete your wealth. So lots of people-and not merely ball players have lots of money.

The supply-side theory, to which the President pledged continued devotion the other night, contemplates that the rich, thwarted in their struggle to consume their income, will invest it. But when 20 per cent or more of the economy’s productive capacity is lying unused, the possibilities of prudent new investment are severely limited. What to do? Nothing for it but to take a flyer in the market. At the same time, the rich of the rest of the world have the same problem-and the same solution. Add to all this the mutual funds, the pension plans, the educational and charitable endowments, the insurance reserves, and the unabashed speculations, and you have a lot of money chasing a limited number of shares of stock.

Ingenious men have worked very hard to increase the number and kinds of paper to buy and sell. Two ways have especially recommended themselves: the development of the stock futures markets, and the computerization of Wall Street. The first created new products (as the brokers call them) out of nothing but the eagerness to speculate; the second, by enabling an increased velocity of trading, increased the opportunities to speculate, just as an increase in the velocity of money in effect increases the money supply.

There was also a partially contrary movement. Takeovers and buyouts, which generally substituted debt for equity, reduced the number of shares of some stocks available for speculation while simultaneously greatly enhancing the taste for speculating.

THE MOST elementary fact about a bull market is that it absolutely and unceasingly depends on sucking more money into it. If there are 100 shares of stock, and $100 available for investment, the price of each share will fluctuate narrowly around a dollar, no matter what incantations are uttered by market analysts and government officials. If the number of available shares is reduced, or the number of available dollars increased, the price will rise proportionately. But all who anticipate a further increase in available funds will become more eager in their bids, in the expectation of quickly and profitably selling what they buy to the holders of the new money. Thus Holland’s Tulipmania was sustained, and thus the Great Bull Market of the ’20s, and thus the Reagan-Thatcher-Nakasone market that has now crashed.

Because one way or another the number of pieces of paper to speculate in has greatly increased, the number of dollars to sustain the recent bull market had to be increased still more, and this has been done in two ways: the shift of trust and endowment funds out of the bond market and into the stock market, and the supply-side tax cuts for the wealthy. The former was substantially effected a couple of years ago, and the latter has gone about as far as it can go with the new tax law’s reduction of the top rate to 28 per cent. There is still a fantastic amount of money around, but it is no longer being increased rapidly. The kissing had to stop.

The trade deficit is said to have joined with the budget deficit in scaring foreigners out of our market. This explanation of the crash overlooks what is ordinarily insisted on: the global interdependence of financial markets. It wasn’t Wall Street alone that laid an egg. Eggs were laid in Tokyo and Hong Kong and Sydney and London before the New York market opened on Black Monday. You might say that all over the world bull markets that had known no boundaries were suddenly fenced in.

Just as the reason for the crash is grievously misunderstood, the policies proposed for dealing with it are grievously misconceived. Since what happened was caused by a large number of people having more money than they knew what to do with, it follows that it is counterproductive to resist taxing some of that money and applying it to public purposes, not excluding deficit reduction. The supply-side tax cuts were a disaster. Since the wealthy couldn’t find enough new productive investments for their surplus funds, it follows that there hasn’t been enough effectual demand (as Adam Smith would have said) to keep our existing productive capacity busy; so the enthusiasm devoted to union busting, entitlement shaving, welfare restricting, and real-wage reducing-all of which reduce effectual demand-has been disastrously misdirected.

Our pundits seem able to behold the mote in German and Japanese eyes but not to consider the beam that is in ours. If the world economy would be strengthened by increased consumption in those lands (and it would), it can scarcely make sense to decrease consumption in ours. Over the past 15 years the income share of the poorest 20 per cent of our families- those who have to spend their incomes-has fallen 10.8 per cent. An economy that reduces its aggregate demand in that way-and seems determined to do more-is not fundamentally sound.

The New Leader

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THE CENSUS BUREAU has finally released its estimates of the 1986 median family income, the numbers of people living in poverty, and the distribution of income among the rich, the poor and the middle class. The news is not the figures: They merely confirm the impression everyone has had. Rather, it is the Bureau’s acknowledging for the first time that “there has been an increase in inequality in the United States during the last decade and a half”-or from Richard M. Nixon through Ronald Reagan.

It is by no means easy to know how to go about measuring inequality. Lars Osberg has written a solid 300-page book on the subject, Economic Inequality in the United States, that is a good place to begin if you want to understand the complications. For my part, I share Disraeli‘s view that there are “lies, damned lies, and statistics.” So I’ll take what the Census Bureau says on trust (or distrust) and simply note that its figures assume the rich, the middle and the poor are fixed percentages of the population, instead of classes with definable characteristics to which variable numbers of people belong. On this basis we always have the three groups with us, and in the same proportions.

Putting to one side the probability that if you want to understand how the economy distributes its benefits wealth[1] is a better index than income[2], I suggest that the customary method of presenting the statistics understates the shocking and dysfunctional economic inequality in the United States. It is bad enough that from 1970 to 1986, as the Census Bureau reports it, the richest fifth of American families increased its share of the national income from 43.3 per cent to 46.1 per cent, while the poorest fifth saw its share decline from 4.1 per cent to 3.8 per cent, and the share of the middle three fifths dropped from 52.7 per cent to 50.2 per cent. My guess is that figures for the same years showing how many families had incomes over, say $500,000 (in constant dollars) and under $10,000 would give a better idea of our increasingly polarized income distribution.

That shifts in distribution are occurring at all has a bearing on a long-running debate in economic theory. A typical statement of one side of the debate is Pareto’s Law, promulgated by Vilfredo Pareto in 1896, and not to be confused with his fashionable but fuzzy notion that goes by the clumsy name of Pareto Optimality. In an impressive array of societies, Pareto estimated as best he could, given the practical nonexistence of reliable data, the arithmetical mean of incomes. These means did not come in the center, as they would have if the distribution followed a standard bell curve. Furthermore, the curve on the high side of a mean was radically different from that on the low side, because there was no top limit to possible income, but everyone below a bottom limit died of starvation, reducing the curve to a straight line at that point.

Pareto’s supposed law is frequently misrepresented to assert that no change is possible in income distribution. Actually, he allowed that change did occur on the low side of the mean. It was, after all, obvious that fewer people starved to death in 19th-century Europe than had done so previously. What happened on the low side of the mean didn’t interest him, though. He was fascinated by the consistent pattern he claimed to see on the high side and by the conclusion he drew from it, namely that progress for the lower orders depended on progress for the top. Efforts at redistribution, in his view, were doomed to failure and could only make it worse for everyone.

Unlike more naive knee-jerk conservatives, Pareto did not claim that the same people would invariably be on the high side. He hoped there would be a lot of movement up and down, in the expectation that this would permit Darwinian laws (which he obviously misunderstood) to improve the species. Nevertheless, his alleged law provides alleged justification for the trickle-down theory of political economy.

Pareto himself recognized, at least in principle, that his law was only empirical. It depended on the facts he so laboriously collected and was inevitably at the mercy of contradictory facts, such as those just released by the Census Bureau. Empirical observations are elevated to the status of laws only if reasoned explanations can be adduced for them. In the present instance, maldistribution of talent or effort has been proposed as the explanation for the maldistribution of economic rewards: If you’re so smart, how come you’re not rich? But the sole evidence for the distribution of talent or effort is the distribution of rewards. The argument chases its tail.

If there is no natural law of income distribution, then human policies can have an impact, and it is no longer rational to argue that prosperity depends on making the rich richer. Indeed, it becomes steadily clearer that a more egalitarian distribution of income would produce greater prosperity. The issue, however, is usually posed in terms of psychological incentives. The economy springs ahead, we are told, because certain people are good at getting things done, and these people need financial incentives.

This has never been good psychology. On the one hand, the real can-do guys, like a Marine lieutenant colonel we have recently heard of, are must-do guys. They get their kicks from doing, not from accumulating, and the problem is to calm them down, not stir them up. On the other hand, you have to use either a carrot or a stick to get most people to do the humdrum jobs and the unpleasant jobs-that is to say, most of the jobs. Carrots are obviously more humane than sticks (I like carrots). Any economy or any company that beats its people with sticks is to that extent inhumane. It demeans itself.

There is also a less pressing reason for a more egalitarian distribution. Keynes wrote a great book to elucidate it. A prosperous economy depends on the society’s propensity to consume, and the propensity to consume depends on the ability to consume, which depends on the ability to pay the bills. “Experience suggests,” Keynes said, “that in existing conditions saving by institutions and through sinking funds is more than adequate, and that measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favorable to the growth of capital.”

THE CENSUS BUREAU figures show that we are going in the opposite direction, and they are ominous from the point of view of our society as well as from that of our economy. “Wealth,” Plato wrote in The Republic, “is the parent of luxury and indolence, and poverty of meanness and viciousness, and both of discontent.” Aristotle saw that “those who have too much of the goods of fortune … are neither willing nor able to submit to authority …. On the other hand, the very poor … are too degraded…. Thus arises a polis, not of freemen, but of masters and slaves.” These observations are obvious enough. Surprisingly, it remained for Rousseau to give the argument a subtle shift: “It is on the middle class alone that the whole force of the laws is exerted; the laws are equally powerless against the treasures of the rich and the penury of the poor.”

In any stable society the middle class is, for all practical purposes, the society. The middle class feels the force of the laws because it has a stake in the laws in things as they are, or at least in the direction things are taking. The upper class feels itself exclusive, the lower class excluded; they are at best indifferent, at worst hostile.

Since super-rich individuals and infra-poor individuals can be law abiding, social class as understood by Rousseau and me is not quite the same as economic class. Yet the two kinds, though they are not congruent, do very much converge; consequently, what the Census Bureau sees happening to what it calls the middle class (the middle 60 per cent of the population) is worth attending to.

The American middle class is slipping economically. Moreover, it is likely that many of the 38.2 million families so classified might more accurately be grouped among the working poor. The average income of those above the middle 60 per cent is $126,415 that of those below is $10,142 (or lower than the official poverty level of $11,203). These figures are a long way from fully disclosing the range of incomes, but they do suggest fertile fields for alienation at both extremes. What can happen here-what is happening here-is not alienation in the sense of allegiance to a foreign power, but alienation in the sense of no allegiance whatever.

To allege that President Reagan has consciously aimed at the erosion of the middle class would be easy, but it would be wrong. The conscious aim has been to make the rich richer on the Paretan theory that the rest of the economy will be dragged upward, too. I hasten to protest that I’m not suggesting the President ever heard of Pareto, let alone read him; it’s just a case of great minds running in the same channel. And not only Reagan’s mind, but Margaret Thatcher‘s and Jacques Chirac‘s and Helmut Kohl‘s, and Yasuhiro Nakasone‘s, and those of most of the leaders of the Third World and of most of the people running the IMF, not to mention every investment banker you ever heard declaiming about the bankruptcy of Social Security. We are faced with something more than an aberration of American politics.

Even if the Democrats manage to avoid self-destruction, and even if they manage to awake, like Rip Van Winkle, from their 20-years dream of middle-of- the-roadism, they will still have to struggle to protect our society from the conservative crazies of the rest of the world. For regardless of what we do at home, these crazies will continue to enrich their rich, who will continue to want to speculate on our markets, which will again suck up and ultimately destroy whatever surpluses we create.

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ANOTHER BUDGET deadline has come and gone and that old devil deficit is still there. What can we do about it? First, we had better consider briefly what would happen if Gramm-Rudman- Hollings were successful in getting the annual deficit down to zero. For we’d have a crashing depression, that’s what would happen. Whether the miracle were achieved by reducing military expenditures or by cutting off the poor or by raising taxes or by all three, somehow $160 billion (more or less) would be abstracted from the economy.

Actually, “abstracted” is the wrong word. The $160 billion would not be taken from the spendthrift government and put in your thrifty pocket to be used in a more propitious time. No, all that lovely money would not exist. Moreover, the possibility of its existence would be gone forever, and with it the goods and services the money might have bought, plus the goods and services that might have been bought by those who would have earned money by producing the first lot, and so on ad infinitum. R.F. Kahn‘s multiplier works both ways.

Or look at it this way: One hundred and sixty billion dollars is about 4 per cent of our gross national product. The average fall in GNP for depressions since World War I has been about 6 per cent. The possibility is more ominous when you consider the unemployment rate. In 1929, the rate was 3.2 per cent. Today, it is officially stated to be 5.9 per cent-and this counts part timers as fully employed, and doesn’t count at all those who are too discouraged to look for work. In other words, we have a head start on any depression we decide to bring about.

Mention of unemployment reminds us of the real point: The vice of depression is not the loss of potential goods and services but the loss of jobs and self-respect. No one can spend much time in the labyrinths of a shopping mall without concluding that we already have more goods and (perhaps) services than we-literally-know what to do with. Our basest beggars are in the poorest thing superfluous. Personal dignity and self-respect depend on the right to contribute to the common wealth. Even without a depression too many of us are denied that right. We are all demeaned by that denial.

Does this mean we are doomed to run deficits forever? Won’t all that debt bring double-digit inflation back again? And isn’t it irresponsible to pass on to our children the consequences of our fecklessness?

When you look at the record, you wonder how these staples of campaign oratory and editorial punditry get taken seriously. In 1980, the deficit was $73.8 billion (or 2.7 percent of GNP), and the gross Federal debt was $914.3 billion (or 33.47 per cent of GNP); the inflation rate was 12.4 per cent. Last year the deficit was $220.7 billion (or 5.2 per cent of GNP), and the gross Federal debt was $2,132.9 billion (or 50.68 per cent of GNP); the inflation rate was 1.1 per cent. There is no way these figures can be tortured to support the claim that a deficit causes inflation (see editor’s chart below).

Well, the states balance their budgets, so why can’t the Federal government? Of course, it could-provided we accepted one of two outcomes: Either private businesses and private individuals would have to increase their indebtedness to match the Federal decline, or we would have to have that depression. The reason for this is simple: The flip side of debt is credit, and credit is money. (If you want to be fussy: not all credit is money, but all money is credit.) Without debt, no credit; without credit, no money; without money, no business. That’s the way the capitalist system works. That’s the golden-egg-laying goose that myopic conservatives want to kill.

But what about our children and theirs? As Keynes observed, it is no favor to our children to neglect our natural and civic and domestic environments and thus save our children from the perils of indebtedness in their adulthood at the expense of forcing them to spend their childhood in squalor.

The foregoing merely suggests ways in which the anti-indebtedness argument is false. It does not claim that the present is the best of all possible worlds, that the level of our current deficit is exactly right, that we might not better buy different things with our money, or that we might not do better by financing the deficit differently.

Let it be said at once that the appropriate level of the deficit is a matter of trial and error. In spite of the most sophisticated programs run on the most powerful computers, Pandora’s box remains closed to us. Consequently, to say that we can fine tune the economy is an exaggeration. It is, however, a fact that we have, in the record of the past 40 years, proof that some kind of tuning can have significant results.

This brings us to the probability that at some time-perhaps tomorrow, perhaps the day after-we may want to tinker with the new tax law we hailed so proudly only yesterday. We may, in any case, want to remind ourselves that taxation is not necessarily for revenue only. Attending a debate in the Academy of Laputa[1], Lemuel Gulliver was struck by a proposal “to tax those qualities of body and mind for which men chiefly value themselves …. The highest tax was upon men who are the greatest favorites of the other sex; and the assessments according to the number and nature of the favors they have received, for which they are allowed to be their own vouchers …. But, as to honor, justice, wisdom and learning, they should not be taxed at all; because they are qualifications of so singular a kind that no man will allow them in his neighbor, or value them in himself.”

That excellently bitter proposal is not explored in the 291-pageDescription of Possible Options to Increase Revenuesrecently prepared by the staff of the Joint Committee on Taxation with the staff of the Committee on Ways and Means. Part I examines what it discreetly calls” Revenue Areas [it would be lese majeste to call them tax increases] Addressed by the President’s 1988 Budget Proposals.” Adopting all of them would increase 1988 revenues by about $3.7 billion-scarcely noticeable in the shadow of a $160 billion deficit. Part II, taking up the document’s remaining 257 pages, examines “Other Possible Revenue Options,” most, if not all, having been suggested by members of the Committee on Ways and Means. These naturally reflect the various members’ interests and capabilities, and many are nutty (as are some of the President’s), while others are politically impossible, at least for now. Though it is likely that, as a whole, they exceed the magic $160 billion goal, there is no point in adding them up because many of them would work at cross purposes, and because nowhere in the pamphlet is there a discussion of the leading weakness of the 1986 tax law.

This weakness is the almost complete abandonment of progressivity. The great strength in the new law is that the grossest shelters were blown down. But, as is well told in Showdown at Gucci Gulchby Jeffrey H. Birnbaum and Alan S. Murray, the Senate Finance Committee grudgingly accepted the strength in order to achieve the weakness.

The attack on progressivity has been going on for several years. It was not so long ago that the top bracket in the personal income tax was 85 per cent. Then it was reduced to 50 per cent on “earned income.” Then to 50 per cent on all income, except for capital gains, which were taxed up to 35 per cent. Then capital gains were dropped back to 20 per cent. And now the top rate is 28 per cent across the board, with a complicated proviso that need not be of concern to you unless your taxable income exceeds $200,000. (The proviso, allowing for certain deductions at the lowest rather than at the highest rate, was one of the few good ideas of the original Bradley-Gephardt proposal. See “A Cautionary Tale of Tax Reform,” NL, January 27,1984.)

HOPE OF CHANGING the tax law’s rate of progressivity was abandoned by everyone who entered the Congressional conference rooms. It was insisted from the start-by Bradley-Gephardt in 1983 as well as by Reagan- Regan in 1986- that a reformed tax law would be revenue neutral. This shibboleth meant not merely that the total revenue raised under the new law would be the same as that under the old, but also that the various quintiles of income recipients would pay the same proportions of the total tax under both laws. An exception was that certain of the poorest of the poor, who had been added to the rolls in the reactionary surge of 1981-82, would now be dropped again.

The new law is certainly better than the old in that whatever is unreasonable or unjust in it is plainly stated rather than shoddily sheltered. But that is not to say it is more reasonable or just. It may, in fact, lead to greater injustice. It is probable that throughout the corporate world executives will demonstrate an increased eagerness for high salaries because they will be able to keep a higher proportion of them. It is probable, too, that the kind of investment banking that leads to raids and takeovers and greenmail will be stimulated, and that so will the securities and commodities and futures markets. It is even probable that the changes in the corporation tax will encourage many companies to increase executive perks, on the ground that the tax collector would get the money if it weren’t spent on limousines and Lear jets.

It will be noticed that the foregoing probabilities are to some degree contradictory. It is something of a paradox that lower personal and higher corporate taxes can be expected to result in both higher executive salaries and perks as well as higher winnings from speculating in the securities of the companies whose earnings are reduced by paying the salaries and perks.

This can happen all at once through an accentuation of the polarization of the American economy. The rich can become richer by keeping the poor in their place and by pushing more of the middle class down to join them. The trend can continue for a damnably long time without arousing much political reaction. The possibility of an economic reaction is more immediate. As Jean Baptiste Say, in one of his acuter moments, wrote, “There is nothing to be got by dealing with people who have nothing to pay.”

Our economy is bad because our morale is bad. For too many years, greed has been admired in high places and doing good has been sneered at. A steeply progressive income tax would be a sign of a shift in morale-which would be far more important than whatever increased revenue might be raised, and vastly more important than the size of the deficit.

The New Leader

[1] Readers with a bent for trivia may recall that one of the targets of Major Kong’s B-52 in the movie “Dr. Strangelove” was Laputa. According to IMDb, “Major Kong’s plane’s primary target, is an ICBM complex at Laputa. In Jonathan Swift‘s 1726 novel ‘Gulliver’s Travels’, Laputa is a place inhabited by caricatures of scientific researchers.”